Cyclical Stock Analysis Rules
Rules specific to cyclical industries: shipping (VLCC, container, dry bulk), metals (steel, copper, tungsten), energy (oil & gas, coal), semiconductors, etc. These extend the universal rules in
UNIVERSAL_RULES_EN.md. Apply both together. Last updated: March 4, 2026.
🔴 CYCLE-SPECIFIC MANDATORY RULES
CRule 1: Two-Cycle Backtrack with Price-Rate Correlation
For every cyclical stock analysis, you MUST:
-
Identify the two most recent complete cycles for the commodity/rate that drives the company’s earnings (e.g., VLCC TD3C rate, tungsten APT price, DRAM spot price, container freight index).
- Backtrack stock price vs underlying rate/price over both cycles:
- Plot or tabulate: commodity rate on one axis, stock price on the other, over time.
- Calculate correlation coefficient (R²) between rate and stock price at weekly/monthly frequency.
- Note the lead/lag relationship: Does the stock move before or after the rate? By how many weeks/months?
- Identify divergence points: When did stock price decouple from the rate, and why? (e.g., market sentiment, leverage, hedging)
-
Cycle anatomy for each of the two cycles:
Phase Rate Behavior Stock Behavior PE Behavior Duration Trough Below breakeven Depressed, high PE or negative earnings High or N/A Early upturn Rising past breakeven Stock leads rate by 1-3 months PE declining rapidly Mid-cycle Sustained above average Stock accelerating, sell-side upgrading PE compressing Peak Historic highs Stock may plateau or lag rate PE at cycle lows Downturn Rate declining Stock leads decline by 1-3 months PE expanding (earnings falling) - Compare the two cycles:
- What drove each? (Demand shock, supply constraint, geopolitical, structural)
- How long did each last? (Trough-to-peak, peak-to-trough)
- Peak rate vs peak stock price — what multiple did the market assign?
- What was the max drawdown from peak? How fast?
- Based on historical patterns, determine where we are NOW:
- Which phase of the current cycle? (Trough / Early upturn / Mid-cycle / Peak / Downturn)
- How does the current rate compare to the two historical peaks?
- Is the stock leading or lagging the rate relative to historical patterns?
- What does the lead/lag pattern predict for the next 3-6-12 months?
-
Output a cycle positioning summary:
Current cycle position: [Phase] (e.g., "Mid-cycle, approaching peak") Evidence: [Rate at X vs historical peak Y, stock at Z vs historical peak W] Historical analog: Most similar to [Cycle N, Phase M] Predicted next move: [Rate likely to X, stock likely to Y] Time to peak (est.): [N months based on historical duration] Key risk: [What ended the comparable cycle]
This rule exists because cyclical stocks are NOT valued on current earnings — they are valued on where we are in the cycle. Getting the cycle position wrong is the #1 cause of losses in cyclical investing.
CRule 2: Cycle-Peak PE/PB Compression Pattern
For every cyclical stock:
- Document the PE/PB at cycle troughs (typically high PE or negative earnings).
- Document the PE/PB at cycle peaks (typically lowest PE despite highest earnings).
- Estimate the PE floor for the current cycle with reasoning.
- Show the full PE compression timeline (Phase 1→5).
Reference template (adapt per industry):
Phase 1 (Trough): PE [HIGH]x — Low earnings, market prices recovery hope
Phase 2 (Early): PE [MID]x — Earnings rising, sell-side skeptical
Phase 3 (Mid-cycle): PE [LOW]x — Earnings strong, market debates sustainability
Phase 4 (Late cycle): PE [LOWER]x — Peak earnings, market prices decline
Phase 5 (Downturn): PE [HIGH]x — Earnings collapsing, stock falling
CRule 3: Supply-Demand Cycle Duration Analysis
Cyclical industries have predictable supply response timelines. Always include:
| Industry | Order-to-Delivery Lead Time | Current Order Book | Implication |
|---|---|---|---|
| VLCC | 3-4 years | Near-zero until 2028 | Extended cycle |
| Container ships | 2-3 years | Heavy post-2021 orders | Shorter cycle |
| Semiconductors (fab) | 2-3 years | Varies by node | |
| Metals (mine) | 5-10 years | Very extended cycles | |
| Real estate | 1-3 years |
- Longer lead times = longer cycles = more time for stock appreciation.
- Heavy order books = earlier cycle turns = shorter window for profits.
- Always check: How many [ASSETS] are on order? When do they deliver? Is this enough to break the cycle?
CRule 4: Operating Leverage Multiplier Table
Cyclical businesses have high fixed costs. Always show:
| Rate/Price Level | vs Breakeven | Revenue | Profit | Margin | Stock Implication |
|---|---|---|---|---|---|
| Below breakeven | <1.0x | X | Negative | N/A | Trough valuation |
| At breakeven | 1.0x | Y | ~$0 | ~0% | Inflection point |
| 1.5x breakeven | 1.5x | Z | Moderate | 20-30% | Early re-rate |
| 2.0x breakeven | 2.0x | High | 40-50% | Mid-cycle | |
| 3.0x breakeven | 3.0x | Very high | 60%+ | Near peak |
This demonstrates that a 2x rate increase can produce a 5-10x profit increase — the core reason cyclical stocks are so volatile.
CRule 5: Contrarian Timing Indicators
Cyclical investing requires buying when fundamentals look terrible and selling when they look amazing. Track these:
Buy signals (accumulate):
- PE is very high or negative (trough earnings)
- Industry capex is at multi-year lows (future supply constraint)
- Sell-side has few “buy” ratings (<30%)
- Companies are scrapping/retiring [ASSETS]
- Spot rates/prices below cash breakeven
Sell signals (reduce):
- PE is at historic lows (peak earnings — this is the trap!)
- Industry capex surging, order books filling
- Sell-side has majority “buy” ratings (>70%)
- Companies launching aggressive expansion
- Spot rates/prices at 3x+ breakeven
- Media headlines about “super cycle” (contrarian signal)
CRule 6: Cross-Cycle Comparable Reference
Always find a reference cycle from a comparable industry. Examples:
| Current Analysis | Reference Cycle | Why Comparable |
|---|---|---|
| VLCC 2026 | Container 2020-22 (中远海控) | Same sector, PE compression pattern |
| VLCC 2026 | VLCC 2008, 2020 | Same asset, different cycle drivers |
| Copper 2024 | Copper 2006-08 | Supply-driven super cycle |
| Semiconductors 2025 | DRAM 2017-18, 2021 | Capacity-driven cycle |
| Steel 2024 | Steel 2016-18 (China supply reform) | Policy-driven cycle |
For each reference:
- What was the peak PE/PB/EV multiple?
- How long from first rate breakout to stock peak?
- What caused the cycle to end?
- What was the max drawdown from peak?
CRule 7: Earnings Sensitivity Matrix (Multi-Rate)
Always present earnings across at least 5 rate/price scenarios:
| Rate/Price | vs Consensus | Net Income | EPS | PE at Current Price | Upside to Target |
|---|---|---|---|---|---|
| Bear (below consensus) | |||||
| Consensus | |||||
| Current spot | |||||
| Bull | |||||
| Super-bull |
Critical: Highlight the gap between consensus and current spot. In cyclical stocks, this gap is often where the alpha lives — sell-side is slow to upgrade.
CRule 8: Exit Strategy Framework
Cyclical investments need explicit exit criteria (not just buy targets):
| Exit Trigger | Action | Rationale |
|---|---|---|
| Rate falls below [X] for >2 weeks | Reduce 30% | Cycle may be turning |
| New [ASSET] orders surge past [threshold] | Begin trimming | Supply response = future rate decline |
| PE drops below [Y]x at peak earnings | Take profits on 50% | Market pricing terminal decline |
| Geopolitical/structural catalyst reverses | Full exit | Bull thesis invalidated |
| Stock decouples from rate (stock down, rate flat) | Investigate — may be early exit signal | Market may see something rate doesn’t show |
CRule 9: Inflation-Adjusted Historical Comparison
All historical cycle peak data must be inflation-adjusted to current dollars:
- Use CPI adjustments for all historical market caps, rates, and prices.
- This prevents underestimating historical peaks (e.g., 2008 rates in 2026 dollars are ~40% higher than nominal).
- Show both nominal and real (inflation-adjusted) figures.
CRule 10: Shadow/Grey Market Monitoring
Many cyclical industries have unofficial supply that affects pricing:
- Shipping: Shadow fleet (old tankers operating under sanctions evasion)
- Metals: Chinese unofficial smelters, stockpile releases
- Energy: Sanctioned oil production (Iran, Venezuela, Russia)
- Semiconductors: Grey-market chips, inventory hoarding
Always assess:
- How large is the shadow/unofficial supply? (% of total market)
- Is it growing or shrinking?
- What regulatory/geopolitical changes could bring it into or out of the market?
- Impact on pricing if shadow supply exits (+) or returns (-)
📋 CYCLICAL STOCK CHECKLIST (In Addition to Universal Checklist)
[ ] Two most recent cycles identified and documented
[ ] Stock price vs rate/price correlation analyzed (R², lead/lag)
[ ] Current cycle phase determined with evidence
[ ] PE/PB compression path documented (Phase 1→5)
[ ] Supply-demand duration analysis included (order book, lead times)
[ ] Operating leverage multiplier table included
[ ] Earnings sensitivity matrix (5+ rate scenarios)
[ ] Cross-cycle reference identified (comparable industry)
[ ] Exit strategy with explicit triggers defined
[ ] Historical data inflation-adjusted
[ ] Shadow/grey market supply assessed
[ ] Contrarian indicators checked (are we buying fear or selling greed?)
📊 EXAMPLES FROM VLCC PROJECT (For Reference)
These rules were derived from our VLCC shipping analysis. Here’s how they applied:
CRule 1 applied: Two cycles identified — 2008 (super cycle, demand-driven) and 2020 (floating storage pulse). Stock prices led VLCC rates by 1-2 months on both upswings and downswings. Current cycle (2026) most resembles 2008 in structure but with tighter supply constraints.
CRule 2 applied: Container cycle (中远海控 2020-22) used as PE compression reference — PE went from 16x to 1x as profits surged 55x. VLCC PE floor estimated at 3-8x (not 1x) due to zero new supply until 2028.
CRule 4 applied: VLCC breakeven ~$25K/day, current spot $150K+ = 6x breakeven. At this level, ~75% of revenue is pure profit. A $10K/day rate increase adds RMB 730M net income for a 52-VLCC fleet.
CRule 7 applied: 5 scenarios ($100K consensus / $120K conservative / $150K base / $200K bull / $250K super-bull) with full earnings, PE, and target price impact for each.
CRule 10 applied: Shadow fleet (old tankers evading sanctions) estimated at 5-8% of effective supply. Currently exiting the market = positive for rates. Monitored as a risk factor if sanctions ease.
This file extends UNIVERSAL_RULES_EN.md. Use both together for cyclical stock analysis.
For industry-specific data (fleet numbers, rate history), see the project’s own RULES.md.